Monday, June 11, 2007

Do the Yankees lose money? Not if you include YES

Forbes magazine recently came out with profit/loss numbers for every major league team. The biggest money-losing team -- in fact, the *only* money-losing team -- was the New York Yankees, who, according to Forbes, lost $25.2 million last year.

But now, an article in New York Magazine claims that while the Yankees did lose money -- $28 million, which is pretty similar to Forbes' estimate -- their cable network, YES, was quite profitable. YES broadcasts Yankees' games to a large New York viewership, which would explain why it rakes in the cash. The article says:

"The Yankees—read Steinbrenner—also own more than a third of the YES network … The network's revenues top a quarter billion and its profit margin is 60 percent."

One-third of 60% of a quarter billion is $50 million. So it seems like if you include YES in the calculation, the Yankees are actually quite profitable.

The New York article wants to treat the Yankees and YES as two separate businesses for purposes of the calculation, but that's silly. If the team's contract with YES were an arms' length transaction, the Yankees would have demanded enough in royalty fees that YES would be making a lot less than $150 million.

By the way, this Wikipedia article implies that the Yankees and YES are each fully owned by the same holding company. If that's true, it follows that the Yankees effectively receive the benefit of all the YES profit, not just one-third, and the team's total earnings are around $125 million. I don't know who's right, if it's 100% or one-third.

In either case, this means that the accounting in the Forbes article wasn't smart enough to take into account teams' related businesses. As a result, we don't know less than we thought about how profitable MLB teams are.

I had previously argued that teams are much less profitable than you'd expect from their market value, and the reason is that owners are willing to sacrifice profit for the glory of owning a team. I still think that's true, but if Forbes really hasn't done a full accounting, the evidence is weaker than it appeared.

If the Yankees only own 1/3 of YES, why would they be willing to sell them rights to the games at below market? They'd be forfeiting 2/3 of the gap between the price and the value. Seems like a losing proposition unless they own the whole station.

Actually, it doesn't matter whether the Yankees own 100% or 30%. Either way, the entire value of YES is derived from the value of the Yankees. Without the team, YES would be worthless.

If the Yankees own only 30%, it's probably because they sold the other 70% for a hefty amount. And in that case, the profit/loss number is almost meaningless.

For instance, suppose that the Coca-Cola corporation sold away their rights to Coke Classic. Since that's their biggest seller, they'd might start losing money on the rest of their products. That would only mean that "the company minus Coke" is a money loser, not that the whole business is.

It's also likely that if you took the sale price for Coke Classic, and you invested it, that would again push the Coca-Cola Co. into the black. Of course, if the owners invested it outside the company, the company would still show a loss. The BUSINESS would be making money, but the COMPANY, which is only PART of the business, would not.

Similarly, you can say "The Yankees minus 70% of the TV revenue" earns only $25 million, but so what? The actual business of running the Yankees, including all the revenue streams, is hugely profitable. If Steinbrenner decided to sell off the most profitable part of the business, so what? The question isn't what the corporation that owns the Yankees earns, it's what all the revenue generated by the team earns.

I wonder how many other teams have sold off some of their revenue streams for cash, in order to post smaller profits.